Zero-Rated Supply Under GST: Exports, SEZ & ITC Refund Explained

This is one of the most important distinctions in GST law and is frequently misunderstood. A zero-rated supply under Section 16 of the IGST Act is a taxable supply on which the GST rate is effectively 0% — but crucially, the supplier is entitled to claim a full refund of Input Tax Credit (ITC) on inputs, input services, and capital goods used to make that supply. Zero-rated supplies include export of goods, export of services, and supplies to SEZ units or developers. An exempt supply, defined under Section 2(47) of the CGST Act, is a supply that is either nil-rated, non-taxable, or specifically exempted by a government notification. When a supplier makes exempt supplies, ITC on inputs attributable to those exempt supplies is blocked under Section 17(2) of the CGST Act — the supplier cannot claim or refund that ITC. This has a massive business impact: a company exporting goods is zero-rated and gets all its ITC back; a company supplying healthcare services (which are exempt) cannot recover ITC on the medical equipment, consumables, or services procured. Always check whether a supply is zero-rated (good — full ITC) or exempt (no ITC recovery) before assuming the tax treatment.

Section 16(1) of the IGST Act, 2017 specifies exactly two categories of zero-rated supply. First: export of goods and export of services as defined under Sections 2(5) and 2(6) of the IGST Act respectively. This covers all goods exported out of India under a shipping bill/bill of export, and all services meeting the five conditions of export of services (supplier in India, recipient outside India, place of supply outside India, payment in convertible foreign exchange, and supplier and recipient not same person). Second: supply of goods or services or both to a Special Economic Zone (SEZ) unit or to an SEZ developer. This includes any goods sent to an SEZ under a delivery challan and any services provided to a business operating within an SEZ. The SEZ unit/developer must provide an endorsement from the Development Commissioner certifying that the goods or services have been received for authorised operations. Importantly, supplies within an SEZ (one SEZ unit to another within the same zone) or from a Domestic Tariff Area (DTA) to an SEZ unit are treated as inter-state supply, and thus IGST applies — but it is zero-rated and the benefit of ITC refund is available.

When an Indian supplier located in the Domestic Tariff Area (DTA) supplies goods to an SEZ unit or SEZ developer, this is treated as a zero-rated supply under Section 16(1)(b) of the IGST Act. The supplier can either: (a) supply under a LUT/bond without charging IGST on the invoice and later claim refund of accumulated ITC; or (b) pay IGST on the supply and the SEZ unit subsequently claims refund. In practice, most DTA suppliers to SEZ choose option (a) — LUT route — to avoid cash flow issues. The documentation required includes: tax invoice with the words "Supply to SEZ unit/developer for authorised operations without payment of IGST under LUT"; an endorsement letter from the Specified Officer (Development Commissioner or Assistant Development Commissioner) of the SEZ confirming receipt of goods for authorised operations; Bill of Entry filed by the SEZ unit; and LUT reference number. The SEZ unit must maintain separate books of accounts for authorised and non-authorised operations. Note: supplies by one SEZ unit to another SEZ unit within the same zone are inter-unit transfers and are not treated as zero-rated — they attract applicable IGST.

For export of goods (physical export via port/airport), the refund of IGST paid at the time of export is largely automated through system integration between GSTN, ICEGATE (Customs), and the RBI-EDPMS platform. Here is how it works: The exporter files a Shipping Bill at the port of export, declaring IGST amount and GSTIN. GSTR-1 for that period must be filed, declaring the export invoice with IGST details matching the Shipping Bill. The Customs system (ICEGATE) validates the Shipping Bill against the GSTR-1 data transmitted by GSTN. If the data matches, the IGST refund is processed automatically and credited to the exporter's bank account registered on the GST portal — no separate refund application is needed. If there is a mismatch (e.g., invoice number, GSTIN, or IGST amount differs between Shipping Bill and GSTR-1), the refund gets stuck in "SB005 error" or similar flags, requiring manual intervention through ICEGATE's PFMS portal. Common mismatch reasons: shipping bill filed before GSTR-1; IGST amount in GSTR-1 differs from Shipping Bill; GSTIN not mentioned on Shipping Bill. For mismatched cases, the exporter must apply manually via Form RFD-01.

No. A taxpayer registered under the GST Composition Scheme under Section 10 of the CGST Act is not permitted to make inter-state outward supplies of goods (with limited exceptions for specific categories). Since exports and SEZ supplies are treated as inter-state supplies under Section 7(5) of the IGST Act, a composition dealer cannot supply goods for export or to an SEZ unit. Furthermore, composition dealers are barred from claiming Input Tax Credit, making the fundamental benefit of zero-rating (ITC refund) completely inapplicable to them. If a business registered under the Composition Scheme wants to export goods or supply to an SEZ, it must first migrate to the regular GST registration by filing Form GST CMP-04 (withdrawal from composition). After migrating to regular registration, the business can file an LUT, make zero-rated supplies, and claim ITC refunds in the normal manner. Service providers registered under the Composition Scheme for services (under Section 10(2A), applicable to service providers with up to ₹50L turnover) are similarly ineligible to export under zero-rating. The composition levy is a simplified flat-rate tax scheme and is fundamentally incompatible with the zero-rating mechanism.